Macroeconomic Chapter 12 Definitions - The Business Cycle, Inflation, and Deflation

Mainstream Business Cycle Theory

Economic growth, inflation, and the business cycle arising from relentless increases in potential GDP, faster (on average) increase in aggregate demand, and fluctuations in the pace of aggregate demand growth.

Real Business Cycle (RBC) Theory

Random fluctuations in productivity as the main source of economic fluctuations.

RBC Impulse

The productivity growth rate resulting from technological change

RBC Mechanism

The two different effects following productivity growth; investment demand changes & demand for labour changes. Such effects cause economic expansion/contraction.

Demand-pull Inflation

An inflation that starts because aggregate demand increases

Cost-push Inflation

An inflation that starts with an increase in costs

Rational Expectation

The best forecast available for inflation that's based on all relevant information.

Deflation Occurs Equation

Money Growth Rate < Real GDP Growth Rate - Rate of Velocity Change

Phillips Curve (PC)

Relationship between the inflation rate and unemployment rate

Short-run Phillips Curve (SRPC)

Shows tradeoff between inflation rate and unemployment rate, holding expected inflation rate and natural unemployment rate constant.

Long-run Phillips Curve (LRPC)

Shows relationship between inflation and unemployment when the actual inflation rate equals the expected inflation rate. Vertical at natural unemployment rate.

The Different Approaches to Understanding the Business Cycle

Mainstream, Real

In the mainstream business cycle theory approach, economic growth, ___, and the business cycle arise from the relentless increases in potential GDP, faster (on average) increases in aggregate demand, and fluctuations in the pace of aggregate demand growth.

Inflation

In the real business cycle theory approach, random fluctuations in ___ is the main source of economic fluctuations.

Productivity

A decrease in productivity decreases investment demand, which decreases the ___

Demand for Loanable Funds

The ___ the real interest rate, the smaller is the supply of labour today.

Lower

What does the when-to-work decision depend on?

Real interest rate

In the ___, inflation occurs if the quantity of money grows faster than potential GDP.

Long run

In the ___, many factors can start an inflation, and real GDP and the price level interact.

Short run

The Different Sources Which Explain The Inflation Cycle (in the short run)

Demand-pull, Cost-push

Demand-pull inflation can begin with any factor that increases ___

Aggregate demand

Main sources of increased costs for Cost-push inflation

Increase in Money wage rate, Increase in money price of raw materials

Why does the Bank of Canada stimulate aggregate demand with Cost-push Inflation?

High unemployment from short run aggregate supply decrease

If the inflation forecast is correct…

Economy operates at full employment

If the inflation forecast predicts an aggregate demand lower than what happens (faster than expected)…

Economy behaves in demand-pull inflation

If the inflation forecast predicts an aggregate demand higher than what happens (slower than expected)…

Economy behaves in cost-push inflation

An economy experiences ___ when it has a persistently falling price level

Deflation

Consequences of Deflation

Redistribution of income/wealth, Lower real GDP, Lower employment, Diversion of Resources from production

Deflation can be ended if the ___ exceeds the growth rate of real GDP minus the rate of velocity change.

Money growth rate

With the SRPC, if the inflation rate is ___ than expected inflation rate, the unemployment rate decreases.

Higher

With the SRPC, if the inflation rate is ___ than expected inflation rate, the unemployment rate increases.

Lower

With the LRPC, a rise/fall in SRPC means there was a change in…

Expected Inflation

With the LRPC, a rise/fall in SRPC as well as a shift in LRPC means there was a change in…

Natural Unemployment Rate